Tariff troubles in timber industry

By Brooks Mendell

What is the role of tariffs — taxes placed on imported goods or services?

Countries use tariffs to restrict trade, to protect domestic industries, to raise revenue, to achieve something. In the current situation with China, the trade war attempted to, among other things, improve protections on U.S. intellectual property. Based on available data, how have tariffs with China affected the U.S. economy and the forest products industry?

Since July 2018, there have been four rounds of tariffs between the United States and China, with the United States increasing tariffs on $360 billion of Chinese imports and China retaliating with $90 billion in levies on U.S. exports. To understand the results, let’s look at recent reporting from The Wall Street Journal and research from the U.S. government.

• According to The Wall Street Journal, “farmers took a big hit. Importers of auto parts, furniture and machinery choked down punishing tariffs ...” U.S. farm exports fell from $25 billion to $7 billion (a 72 percent drop) and prices to U.S. consumers for appliances and furniture increased 3 percent.

• Foreign direct investment (FDI) into the United States fell. Data from the U.S. Bureau of Economic Analysis confirms that first year FDI, where international firms allocate capital to facilities and businesses in the United States, declined in 2016 and 2017 and was 32.5 percent lower in 2018 than it was in 2015.

• And according to the Federal Reserve, the tariffs led to a net loss of manufacturing jobs in the United States.

How have tariffs affected the U.S. forest products industry?

According to Time Magazine, the trade war hurt the U.S. lumber industry and moved forest harvesting from sustainable forest management in the United States to markets with less oversight. Chinese furniture makers, who prefer U.S. hardwoods, turned to suppliers from Russia and Malaysia because tariffs increased the costs to them of hardwood logs and lumber from the United States. Since the trade war started, U.S. hardwood exports to China have fallen nearly a third impacting rural communities in the Midwest and South.

The “Phase One” trade deal signed with China on Jan. 15, in which the United States agreed to postpone additional announced tariffs and to partially reduce others, does not remove existing Chinese tariffs on U.S. log exports. China placed tariffs of 5 percent to 25 percent on most hardwood and softwood log species. Through November 2019, hardwood log exports to China were down 35 percent, year-over-year, and softwood log exports to China were down over 40 percent, or 2.3 million tons, year-over-year. Regionally, the U.S. South and West are most exposed to these tariff effects.

Tariffs are taxes. And tariffs are expensive.

According to the Federal Reserve, the trade war cost the U.S. economy about 1 percent of growth (or about $200 billion). And while the U.S. government provides U.S. farmers with $28 billion in compensation and aid to partly offset negative impacts from the trade war, the U.S. government does not include wood as an agricultural product. So, forest industry manufacturers and suppliers feel left out as they do not have access or eligibility for the support available to farmers.

Tariffs are efforts to pick winners and losers by the government.

In the forest industry, tariffs have punished entrepreneurs, small businesses, employees and local communities exposed to log trade, hardwood lumber and potential investment in local manufacturing facilities.

Trade wars create collateral damage that can do more harm to private forest owners and forest products firms than to strengthen U.S. business in the short or long term. P

Brooks Mendell is president and CEO of Forisk Consulting. Forisk delivers forecasts and analysis of forest industry markets and timberland investments, www.forisk.com.